Everything I know about trading, I learned in the kitchen

If you are fan of reality show especially if it is related to food theme , you are in for a treat.

Everything I know about trading, I learned in the kitchen
Have you ever watched the tv shows "Hell's Kitchen" and "Ramsay's Kitchen Nightmares"? They're surprisingly entertaining and if you have some time to kill, I definitely recommend them. In "Hell's Kitchen", the world-renowned top chef Gordon Ramsay takes twelve aspiring chefs from across the States and in a Darwinian trial-by-fire, trains them to run a multi-million dollar fine dining restaurant while winnowing out the unsuitable candidates. Unlike many of these reality tv shows, Ramsay tries to build strong team players rather than strong individuals, all the while escalating the stresses so that some people discover inner strength they never knew they had.

In his series "Kitchen Nightmares", Ramsay spends one week with a restaurant that is in imminent danger of bankruptcy and tries to pull it around, then he comes back a month or two later to see how things have changed. When he shows up, the management shows all of the classic signs of resignation, frustration, confusion and hurt that I see in myself and other struggling traders. They've poured their heart into a venture and they're still pouring money into it, but for reasons they can't comprehend, nothing seems to be working.

Like trading, the attrition rate for restaurants is extremely high with over 75% failing within their first year. Many owners set out to run their restaurant with little more than a dream, making them very similar to traders. After watching an episode or two and seeing the desperation and confusion on their faces, I immediately identified with them.

I think there's a lot that we can learn from them.

1. Self-confidence keeps you alive; pride can kill. The successful chefs on "Hell's Kitchen" and the restaurant owners in 'Kitchen Nightmares" all have a strong sense of self-confidence. They need it to deal with the risks and uncertainty, and they need it to keep bouncing back after losses. However, if they are proud then they refuse to accept any responsibility. Once that happens, they stop learning and their failure is guaranteed.

2. Belief is important, but reality wins. All of the chefs have developed strong beliefs about what foods taste good, about what is important and about what it takes to win. Without this, they would be paralyzed. But plenty of people have beliefs which are totally out of whack with reality. They are the chefs who insisting that they're the best chefs because they have more training despite the fact that less qualified chefs beat them time and time again. They seem positively delusional, talking about how bad the short order cooks are, despite the fact that the short order cooks are running circles around them.

The people who win are those who are able to accurately assess their abilities and their weaknesses in time to correct them. No matter what your beliefs, you must make sure they agree with reality.

3. Remain open to criticism. Everyone in the show is working far harder than they have ever worked and it still isn't good enough. The people who succeed are those who understand that effort is not enough, they must also perform. They may not like criticism, but they listen to it and they respond and learn and come out better chefs. The people who fail are those who believe that effort alone is enough.

As a trader, we don't get paid a salary and we aren't entitled to anything. Effort may not be rewarded with results, but the one thing the market will do is to tell you whether your ideas are working or not. We must always be listening and never grow complacent.

4. When times are bad, focus on your core. In a restaurant, the care is the kitchen. Make sure everything is running smoothly and that will give you a base to stand on while you sort out other issues. In trading, our core may be a single strategy at a single time with a single group of stocks that you can reliably execute. When times are tough, drop as much excess baggage as possible so that you can focus on a single thing and execute it perfectly. With that, you will not only have some confidence but you will have the income to expand again.

5. Understand and adapt to the market. In one restaurant, a very young chef wanted to cook "fine dining" even though he was cooking in a blue collar village in an unknown restaurant. At the time, they offered free meals but still couldn't fill the restaurant!

To test a theory, Ramsay made a few meat pies and the chef made his signature scallops then they went into the street to see what people preferred, and hands down, everyone wanted the meat pie. They reworked the menu to include steaks, meat pies and very simple but tasty country cooking and redressed the interior to look like a proper English bistro and they managed to pull in over 2,000 Pounds in one night, where they used to pull in 200 Pounds in a week.

I think the analogy to trading couldn't be clearer. Our wishes and desires about the market don't count for anything. If we persist in trading an inappropriate strategy, we will be struggling, losing money and very frustrated. We must follow the market, even to the point of discarding strategies that we have invested a lot of hopes into.

6. It may be easier to lose money than to take the steps to change. This is a hard one to understand at first, but I see it in a lot of traders and it's very common in Kitchen Nightmares. Once a trader or restaurant owner finds a groove (or a rut), it is easy to continue. Making changes means admitting that you're wrong, learning something new and risking failure, while continuing unchanged means you can keep blaming something else and fail because of some external problem.

For example, one restaurant owner was losing money because she was running a "family" and not a business, and changing meant taking control, changing her relationship with the employees and turning a friendly, easy-going business into a professional one. She knew what she had to do, but had been avoiding it for months even though she was nearly bankrupt because of this.

I hate to see it but there are many traders who act in just the same way. They may know that some days or strategies are very wasteful but they refuse to change despite all their protestations. For example, a trader may have a very good rate of return on their swing trading yet invest all of their time and money into day trading because they enjoy it more. Or they may know that averaging down has resulted in several huge losses which wipe out all of their gains for the month or the year, yet they don't take steps to eliminate this behavior. They know what has to be done, but it is easier to continue unchanged and lose money rather than to make the necessary changes.

7. Real change requires a lasting commitment. When Ramsay is in the kitchen, everything seems like it is turning around, life is good and the future is rosy. But when he leaves, the passion and the commitment fades and the old habits return. Within a month, unless there is a powerful and continual drive to change, the restaurant will be right back to where they started. All of the old procedures and issues will be back. To have lasting change, we need to do more than make a resolution, we need to check our progress regularly and guard against the reappearance of old habits.

nkhoi, that is an excellent post. As someone who has a passion for cooking and always aspired to restaurant operation, I can identify with all those thoughts.

Trading as a business instead of recreational gambling from the comforts of home is exactly like any other business: hard work, tedious, challenging, cyclical, tumultuous... everything any entrepreneur experiences in any small business operation.